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The Facts on Social Security Reform and Intergenerational Equity

UPDATED: The table now also includes average scheduled benefits in 2050.

A scuffle between Social Security advocacy groups and Fiscal Commission co-chair Alan Simpson has made some news over the past week, bringing out arguments on both sides about Social Security reform (see here and here for countervailing examples). Sen. Simpson argued that reform plans such as the one proposed in Simpson-Bowles are necessary for future generations who would otherwise see their benefits cut drastically when the Social Security trust fund runs out (and remain at those reduced levels thereafter). A group of young professionals (age 22 to 40) shot back, saying that the cuts in Simpson-Bowles would actually be the most harmful to young people like them. As they argue:

To a person, we have concluded that you are flat wrong when you claim that the Bowles-Simpson plan to alter Social Security would be good for our generation. In a recent letter to the California Alliance for Retired Americans, you assert that the Bowles-Simpson plan is "trying to save" young people, who otherwise are "going to get gutted." In truth, it is your proposal that would "gut" our Social Security.

Let's look at these claims.

For background, the Simpson-Bowles Social Security plan would make a number of changes to benefits as well as taxes. Specifically, the plan would gradual modify the benefit formula to slow initial benefit growth for higher earners, index the retirement age to longevity, so it grew about one month every two years, use the chained CPI for cost-of-living adjustments, gradually increase the "taxable maximum" so individuals paid the Social Security payroll tax above the current $110,100 cap, and include all newly-hired state and local workers in the program. In addition, the plan would introduce a minimum benefit for low-wage workers and have a benefit bump-up for beneficiaries who have been in the system for twenty years.

It is beyond dispute that these change would impact younger generations. Indeed, the slow phase-in of the benefit formula reduction and retirement age increase are specifically designed to minimize the effect on those in or near retirement while giving time for younger generations to better plan for their retirement. Yet using this fact to suggest Simpson-Bowles "guts" benefits for younger generations misses two major points:

Under the Simpson-Bowles plan, initial benefits would continue to grow faster than inflation for all income groups -- meaning workers today will recieve higher benefits than current retirees.

By making the program sustainably solvent, Simpson-Bowles prevents a 25 percent across-the-board benefit reduction in 2033. As a result, all but the highest earning workers will recieve higher benefits under Simpson-Bowles than under current law.

To demonstrate these points, we used the Social Security Administration's Chief Actuary's evaluation of Simpson-Bowles, along with current benefit projections to estimate benefit levels under various scenarios. Since the signatories of the letter ranged in age from 22 to 40, we decided to look at the year 2050 -- when today's 30 year olds would be reaching the normal retirement age under Simpson-Bowles.

It is important to note that these estimates look at initial benefits at the normal retirement age -- meaning they seperately account for the fact that individuals would need to work a year longer under Simpson-Bowles (first row) and do not account for the savings from switching to a more accurate measure of inflation (which would affect all generations roughly equally).

Initial Benefits at Normal Retirement Age (2012 Dollars)

1990

2010

2050 Scheduled

2050 Payable

2050 S.B.

S.B. as % of Payable

Normal Retirement Age

65

66

67

67

68

+1

Very Low Earner

$7,100

$8,500

$13,700

$10,400

$19,200

184%

Low Earner

$9,300

$11,100

$18,000

$13,600

$19,200

141%

Medium Earner

$15,300

$18,400

$29,600

$22,500

$27,700

123%

High Earner

$19,000

$24,400

$39,200

$29,900

$32,000

107%

Maximum Earner

$20,600

$29,000

$48,300

$37,000

$36,000

98%

Source: SSA

For most beneficiaries retiring in 2050, the Simpson-Bowles plan is better than the do-nothing approach--in some cases, much better. Those classified as "very low earners" would receive annual benefits of $19,200 per year if they retired at the normal age -- compared to the $10,400 they would receive (retiring a year earlier) under current law and the $8,500 they receive today. Even those classified as "high earners" would still receive more than is payable at the normal retirement age, and almost as much as payable at age 65.

Of course, money cannot be produced out of thin air. While most earners would receive far more under Simpson-Bowles than under current law, the very highest earners would not only receive less in benefits -- but would also pay more in taxes than what is currently scheduled. This highlights a key feature of the Simpson-Bowles plan; it makes the benefit formula much more progressive. At the same time, most workers would be asked to work modestly longer under Simpson-Bowles (though about 20 percent would recieve a "hardship exemption") -- about one year more than scheduled by 2050 and two more by 2075.

Simpson-Bowles is certainly not a free lunch, nor is it by any means the only approach to fixing Social Security. But it is a sensible one which balances the needs of current and future generations. There is no question, it is better the schedule modest, gradual, and targeted changes today than to allow a sudden 25 percent cut hit all current and future workers tomorrow.